#Cambodia 911? As seen on a fire truck.. (Taken with Instagram)

#Cambodia 911? As seen on a fire truck.. (Taken with Instagram)

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Dinner at ‘yellow awning place,’ under cover from the heavy #Cambodia rain. (Taken with Instagram)

Dinner at ‘yellow awning place,’ under cover from the heavy #Cambodia rain. (Taken with Instagram)

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Leopard Capital allegedly sank seafood firm

the latest, from a colleague and myself. it’s a doozy.

By Tom Brennan and Don Weinland

In Sihanoukville, just north of Cambodia’s only deep-water port, stands the headquarters of Chenla Seafood. A uniformed guard stands watch at the gate, which opens on to manicured grounds and a two-building facility that houses what will likely become the country’s premier seafood processor.

A few kilometres up the hill and away from the water lies the former plant of Nautisco Seafood Manufacturing, which once held the mantle soon to be captured by Chenla. 

In sharp contrast to its successor, Nautisco’s facilities show significant wear. 

The black mould overtaking the factory walls and tall grass covering the yard give the impression the factory has not been used in years.

In fact, operations ceased only last November. 

And the link between the rise of the first and the collapse of the second, according to Nautisco Seafood’s majority shareholders, is Leopard Capital, the Kingdom’s bellwether private-equity firm.

A criminal case is playing out in the Phnom Penh courts in which Leopard, a minority stakeholder in Nautisco Seafood, is being charged with breach of trust and fraud in causing the company’s collapse. 

The majority shareholders, a small group of Canadians who control Nautisco Seafood through a parent company called Nautisco Inc, claim Leopard sought to intentionally sink the seafood processor, capture its assets through a series of complex debt deals, then launch a competitor, Chenla.

The Post first reported the legal dispute between the two parties on January 30, less than two years after Leopard Capital’s initial investment in Nautisco Seafood.

At the time, Leopard Capital Cambodia managing partner Scott Lewis threatened to sue The Phnom Penh Post if it ran the story. 

But further investigation over the past couple of months has revealed that Nautisco Seafood suffered deep and sustained financial problems for much of its operating history, and that Leopard appeared to use that misfortune to its advantage.

Bullish prospects

The investment firm first bought into Nautisco Seafood in May, 2010, purchasing a 34.18 per cent stake for US$1.6 million, the Post reported that month.

Documents obtained in recent weeks, however, show Nautisco Seafood, which launched in September 2009, earned just $34,407 in revenues through the close of the year, indicating Leopard saw significant upside in the business.

Indeed, Leopard chief executive Douglas Clayton said as much to the Post after the deal.

“We are bullish on Cambodia’s prospects to break into the global seafood trade,” Clayton wrote in an email at the time.

But according to the criminal complaint filed by Nautisco Seafood, $4 million in start-up capital from the company’s early investors was not enough to overcome a host of issues hindering profitability, including human-resource problems, a limited supply of raw materials and challenges in meeting the international food-safety standards necessary to gain access to key export markets.

Even after Leopard’s investment, those problems continued to get worse.

‘Going concern’

By October, 2010, “the company was facing severe financial problems”, according to the criminal complaint filed by Nautisco Seafood. 

Two lines of credit worth $500,000 taken from Cambodia’s Advanced Bank of Asia the previous summer seemed to do little to improve operations.

Lionel Letessier, an Indonesia-based consultant hired by Leopard to survey the plant, noted in a later report obtained by the Post that “process flow, [quality control], sanitation, product quality, maintenance, etc, must absolutely be improved”.

Despite this list of inefficiencies, though, Letessier said he doubted they would explain the company’s “huge losses”, which were more likely a product of “high-level mismanagement”.

Nautisco Seafood’s former chief executive, Peou Sambath, declined to comment for this story, as did officials from Leopard Capital and majority shareholder Nautisco Inc.

But some former employees and brokers that supplied raw shrimp to the company pointed to a culture of nepotism at Nautisco Seafood that allegedly gave rise to shady business practices.

“They lost profits because they had a lot of people from the same families working there, and they were corrupt,” Hak Houern, a procurement officer, told the Post. 

Chour Kenghung, a shrimp broker operating in Sihanoukville, claimed Nautisco Seafood had nearly gone bankrupt at one point “due to its nepotism and inside corruption”.

A lawyer for Nautisco Inc claimed the company’s investigation into corruption allegations showed that a top procurement official at Nautisco Seafood had taken bribes from shrimp brokers looking to secure their relationship with the company.

The investigation also allegedly revealed that the official gave little consideration to the size and quality of shrimp purchased and paid above-market rates for the raw supply.

While that may explain, at least in part, Nautisco Seafood’s excess loss of cash, the Post was unable to substantiate the claims through its interviews with a number of the company’s shrimp suppliers and former employees.

What is revealed in the company’s financial statements from 2010, obtained by the Post, is that very little of the growing debt load was put towards improving the efficiencies and capabilities of the company. 

Only about $81,000 was spent that year on property, plant and equipment, despite net cash of $1.3 million generated from short-term loans and proceeds from shareholders. 

Much of the rest of the cash seems to have gone to procurement of raw supply, which for whatever reason failed to translate into profits for the company.

At a board meeting on November 7, an agreement was reached where Leopard officials would engineer a loan “with the stated aim of preventing the company from becoming insolvent”, according to the criminal complaint. 

Two days later, the board voted to push forward with a refinancing plan to prevent insolvency, and accepted a new line of credit with ABA worth up to $900,000. 

In December, Nautisco Seafood tapped another $500,000 from the bank.

Nautisco Seafood finished 2010 with a net loss of $1.2 million for the year, according toMorison Kak & Associates, the independent auditor that prepared the company’s financial statements that year.

In its report, which was also obtained by the Post, Morison Kak said the projected $5 million in sales for 2011 would “at best ensure the break-even point”, putting Nautisco in danger of not meeting its debt obligations the following year.

“Without shareholders’ financial support or any substantial cash injection, the company cannot continue as a going concern,” the report said.

‘True intention’

The start of 2011 brought with it an important question for Nautisco Seafood Manufacturing, according to its majority shareholders, beyond just the failing operations. 

Was Leopard Capital acting in the company’s best interests?

The criminal complaint alleges that Leopard was not. In addition to charging higher interest on loans made to Nautisco Seafood than the company received from other banks, the majority shareholders claim Leopard also began to charge interest on the cash collateral it put up to back those other loans. 

In addition, Leopard allegedly demanded Nautisco Seafood grant the investment firm full title and ownership of newly purchased equipment up to $150,000 in the event of default as security for the cash collateral.

A similar move to acquire assets is said by the majority shareholders to have taken place in June, when Leopard Cambodia Fund, which was linked to Leopard Capital, issued $200,000 to Nautisco Seafood at zero per cent interest. 

But the money came with the condition that all inventories at the time of the loan and any purchased thereafter be used as security in the event of default.

The complaint alleges the board of directors did not approve the loan, and that  it was agreed upon only by CEO Peou Sambath, who also served as chairman of the board of directors, and Leopard Cambodia managing partner and Nautisco Seafood director Scott Lewis.

Nautisco Seafood sought as much as $1.25 million in credit throughout 2011, with Leopard Capital fronting a significant amount of cash collateral with conditional agreements. 

These moves show that Leopard’s “true intention [was] to drive the company into financial distress unnecessarily and thus acquire ownership at a low price”, according to the criminal complaint.

To that end, Nautisco’s lawyers say, Leopard entered into a side deal with ABA to purchase all the bank’s loans to Nautisco without board approval or the knowledge of the majority shareholder. 

This, in effect, made Leopard the company’s biggest creditor, a fact that was confirmed to the Post by Scott Lewis in January.

“The minority shareholder then threatened to immediately call in the loans to [Nautisco Seafood] in an attempt to extort more money from the majority shareholder, Nautisco Inc,” the complaint alleges.

Technically insolvent

Leopard newsletters issued in 2010 and 2011 painted the picture of a successful and growing seafood operation, while financial statements and emails showed an increasingly insolvent and ailing company.

“The company is illiquid and thus technically insolvent. There are insufficient funds to … pay outstanding raw material suppliers or the operating costs and salaries due at the end of August,” Leopard consultant Gordian Gaeta wrote in a memo to Nautisco stakeholders last summer. 

The following month, he proposed winding down the company, according to the complaint, and the board agreed to stop procuring raw materials, sell off inventory and terminate most workers.

A decision was made to halt operations at the Sihanoukville plant from November 4, after a board meeting was held the day before without the participation of the majority shareholder.

Yet Leopard’s December newsletter noted only that “local operational challenges” continued to trouble Nautisco Seafood, but demand continued to be robust.

By the time the December newsletter was issued, Nautisco had no senior management, as the complaint alleges Leopard refused to discuss the renewal of contracts for the company’s top positions.

A staff of 600 in August had been reduced to less that 20.

Clandestine discussions

Rumours that Leopard was about to launch its own seafood operations in Sihanoukville circulated among industry insiders at the end of last year. 

In mid-December, Nautisco’s largest customer, Hanwa Co Ltd of Japan, told Nautisco Seafood chief operating officer Yuriy Koltykov there was speculation that Leopard would co-operate with local seafood outfit Ocean King, according to the complaint.

The complaint continues, saying Leopard’s Gaeta and Lewis engaged in “clandestine discussions” with Hanwa in Tokyo last October. 

However, the majority shareholders claim the talks upset Hanwa, and Leopard has since refused to discuss them. 

Representatives from the Japanese distributor did not respond to email requests for comment.

New seafood factory

As Nautisco floundered during the summer of 2011, the complaint alleges Leopard insisted that shrimp inventory be dramatically increased and  moved to the Ocean King factory for storage.  

A due diligence report on Nautisco Seafood, conducted by Leopard’s finance team, showed a significant drop in that inventory as of October 31 – to just over $689,000 from $889,361, a 22 per cent decline.

The report calls the difference “materially significant”, citing causes such as cost allocation, spoilage of raw material, inaccurate recording in the accounting system and fraud. Leopard’s first mention of a new company came last month, when it stated in another newsletter that Nautisco HK, the Hong Kong affiliate the company used to invest in Nautisco Seafood, “has started a new seafood factory in a leased modern factory in Sihanoukville”. 

The name of the Sihanoukville entity is not disclosed in the newsletter, but Ocean King’s owner told the Post last month that Leopard was in fact leasing his plant. 

Ministry of Commerce
 documents also show that Chenla Seafood is a subsidiary of Nautisco HK, and that Scott Lewis is the representative for the latter firm in Cambodia.

Former Nautisco procurement officer Hak Houern said he worked briefly for Chenla in preparation for the company’s launch but quit after having disagreements with Leopard management. 

“I hear [Chenla] will start to operate their new factory after Khmer New Year,” he said.

Questions about Nautisco Seafood chairman and CEO Peou Sambath’s responsibility for the company’s failure, as well as his relationship with Leopard Capital, remained unanswered. Nautisco Inc officials did not respond to questions about their inability to exercise control against minority shareholder Leopard or steer the company to profitability.

As the Post reported in January, a Phnom Penh municipal court had ordered a plan of compromise earlier that month and appointed an administrator to handle the proceedings. 

The Nautisco Seafood statement at the time defined a plan of compromise as a legal process where the courts act as an unbiased third party to solve the dispute, and “protect the business while a sustainable business plan is developed”.

Leopard has appealed that ruling and a hearing is planned in front of Judge Gnoung Thul on April 26, sources said. 

Attempts at an out-of-court settlement have proved unsuccessful.

In Leopard’s March, 2012 newsletter, the firm said only that shareholders have been unable to agree on a restructuring plan for Nautisco and that the “disagreement is being addressed through appropriate channels”. 

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DFDL, former partners continue their dispute

The followup to the previously posted story:

DFDL, former partners continue their dispute
Tuesday, 28 February 2012

The dispute between DFDL, the regional advisory firm that over the weekend appeared to lose much of its Cambodian tax team, and its former partners continued yesterday as both sides argued over the split.

Edwin Vanderbruggen, a DFDL partner who served as managing director of the company’s tax and customs practice group, announced on Saturday by email that he, fellow partner Jean Loi and a number of DFDL tax advisers had left to form an independent venture.

Although Vanderbruggen and Loi claimed they had left DFDL on good terms, DFDL later rejected that notion in a statement, saying the company was “surprised and disappointed” to learn of its employees’ “sudden departure”.

Vanderbruggen’s email listed as many as 15 DFDL employees, apart from the two departing partners, that would join the new company, VDB Loi. 

DFDL regional chief executive Michel Dauguet, however, said yesterday some of those employees were still with the company. 

He also said he could not confirm the exact number of employees who had left, as they had not submitted individual resignation letters.

“At least one adviser listed in Edwin’s announcement indicated that he/she was not even aware of his/her alleged change of employer,” Dauguet said.

“Another two indicated that they had not received any offer from the new entity.”

Vanderbruggen yesterday  denied that the list of departing employees in his Saturday email was wrong.

“The list that I sent out is correct .  .  .  and there have been no changes.”

Dauguet noted that Vanderbruggen and the firm’s partners were in discussions about the split. DFDL would let those discussions “run their due course before settling on any appropriate course of action”, he said. 

“In order not to compromise our ability to implement any measures, whatever these might be, these will remain internal matters and not be disclosed publicly in the short term,” Dauguet said.

Vanderbruggen declined to comment on any discussions between him and DFDL about his contractual obligations to the firm, including non-compete clauses, saying it was “an internal matter”.

DFDL continued its operations yesterday, in addition to rebuilding its staff, Dauguet said. “We have serviced clients with integrated legal and tax services for 18 years … and we will continue doing so for many years to come.”

DFDL had named Jack Sheehan, who previously served as regional director of the company’s tax and customs practice  in Laos, to replace Vanderbruggen, Dauguet said.

He said DFDL was “finalising some discussions with high-calibre candidates” and planned to make an announcement “in the coming days” about new tax advisers that would join the firm.

In response, Vanderbruggen said he was “pleased to hear that DFDL will put together a team under Jack’s leadership”.

“I recruited Jack myself in Laos eight months ago. He’s a good guy. I have no doubt DFDL will continue to offer tax advisory services and will be good at it,” he said.

Dauguet rejected that suggestion, claiming another partner based in Laos was primarily responsible for bringing Sheehan on board. Vanderbruggen was a part of the overall recruitment process, though, he said.

“As it turns out, Jack’s loyalty remained to DFDL and … not to Edwin,” Dauguet said.

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A year later

Touched down at Phnom Penh International Airport, just after midnight, exactly one year ago today. The drive into the city’s center was surreal, just the same as the quickness with which the past 12 months have passed. It looks like I’m about to sign up for another 12, with salary negotiations almost complete. Stay tuned…

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Tensions at DFDL prompt creation of new firm

Been swamped lately, reporting, writing, editing, managing staff and doing layout. It’s made what were typically late nights, even later. Regardless, though, I’ve loved chasing some pretty important stories. Below is an account of one of Cambodia’s most important advisory firms losing a sizable chunk of its tax team, and the tensions that followed. I’ll add the followup in a separate post.

Tensions at DFDL prompt creation of new firm
Monday, 27 February 2012 

Two partners and about 20 employees at DFDL, a regional law firm that has consulted on some of Cambodia’s biggest investment projects over the past 16 years, stunned the company last weekend with an announcement of their departure to start a new tax advisory outfit.

The departing partners, who were based in Phnom Penh, yesterday said that months of negotiations to restructure DFDL’s tax unit had proved unsuccessful, leaving them no choice but to leave.

Edwin Vanderbruggen, now a former DFDL partner and managing director of the company’s tax and customs practice group, claimed that he and fellow partner Jean Loi had held discussions with management about the company’s tax division – and leaving the firm entirely – since at least the middle of last year. 

Those talks had proved unsuccessful, Vanderbruggen said.

“Something had to be done. These talks were dragging on and it wasn’t confidential anymore, and it was affecting the spirit and atmosphere in the office,” he said, claiming that DFDL employees, clients and competitors knew of the office tensions.

DFDL, however, said in a statement that it was caught unawares by the move and claimed that the partners were under obligation to the firm. 

“Appropriate measures” would be taken in response, it said.

“We were surprised and disappointed to learn about Edwin Vanderbruggen’s and Jean Loi’s sudden departure from DFDL,” the firm said. 

“The path chosen by Jean and Edwin is in conflict with their obligations to the firm.

“DFDL is taking the appropriate measures in this regard while carrying on servicing our clients in our core areas of expertise, including tax advisory,” according to the statement.

The company did not specify what those obligations were or the exact measures being taken in response, and declined to answer follow-up questions from the Post yesterday. 

But DFDL did say that further statements about Vanderbruggen and Loi’s departure may be coming this week.

Vanderbruggen and Loi originally described their split with DFDL as amicable, but were forced to retract those statements once DFDL released its statement to the press. 

In an email on Saturday titled, “Farewell from the DFDL Tax Team”, Vanderbruggen said that he, Loi and the other departing DFDL employees would be “pursuing our career in tax services in a new professional capacity”.

Loi, who worked for more than a decade with PricewaterhouseCoopers in New Zealand, Cambodia and Vietnam prior to joining DFDL in 2011, was named in the email as Vanderbruggen’s partner in the new venture, VDB Loi.

The email said a group of 19 tax professionals working for DFDL, largely in Cambodia but also in Vietnam and Singapore, would join VDB Loi.

“We leave our friends at DFDL on good terms and we wish them every success,” Vanderbruggen said in the email.

Vanderbruggen and Loi said yesterday their goal was to create a tax and legal consultancy for businesses seeking to invest and operate in Southeast Asia. 

VDB Loi was up and running in Cambodia, Vietnam and Singapore, and would soon add an office in Laos. 

“If you want to deliver a real solution to the client, you need to be able to provide a very integrated tax and legal solution” to them, Vanderbruggen said, with Loi adding that the firm “can offer a one-stop shop for all my clients”. 

When first reached by phone yesterday, they reiterated their claim that the split from DFDL was amicable. 

“DFDL’s an excellent firm,” Vanderbruggen said. 

“These guys are my friends. I think they understand we all want to pursue our careers in our own way.” 

Loi also claimed their departure was a positive one, saying, “From my point of view, this has been an amicable split.”

However, DFDL’s statement rejected that notion. 

“Contrary to what they may have suggested in recent communications, this separation was not made with our consent and knowledge, and is not amicable.”

DFDL also disputed the claim the partners had left with “our entire team of tax advisers”.

“This is incorrect and misleading,” the statement said. 

“DFDL has a strong and loyal team of highly qualified tax advisers ensuring continuity of quality tax services to all our existing and future clients.”

When asked about DFDL’s response, Vanderbruggen said he did not know of any obligations to DFDL that prevented him, Loi or the other employees from starting the new business.

He claimed only that there were some “financial consequences” for partners, though he did not elaborate on what those consequences were.

Vanderbruggen also declined to comment on whether DFDL knew about the departure prior to Saturday’s email, or about which DFDL clients planned to follow him to his new firm.

“Once the dust has settled, I’m very confident we’ll have a very nice practice,” he said.

Dun Kosal, a senior adviser for tax compliance in DFDL’s Phnom Penh office, said yesterday he did not know of Vanderbruggen’s decision to leave until Saturday’s email.

Most of the tax team in Cambodia seemed to have left, he said, “except me”. 

Dun Kosal said he had largely no reaction to the news, and was waiting for word from the company’s remaining partners  on what would happen next. 

“I’ll go to work as normal … and we’ll see.”

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Toe, fractured. You can see it just to the left of the knuckle. The good news: it’s healing.

Toe, fractured. You can see it just to the left of the knuckle. The good news: it’s healing.

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Got the chance to report and write this week — felt good. Been lost in a rut of subbing and layout. Both stories made the front page.

Oil production delayed: Chevron’s expected deadline for production by year-end, blown.

Seafood spat leaves bitter taste: Country’s top seafood exporter alleges foul play by its minority shareholder, the country’s leading private equity firm.

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I got this

The election for prime minister comes next year, but our current PM, Hun Sen, who took power in a 1997 coup, is already predicting a winner: himself.

Check out this quote from a speech he gave at Sen Monorom, Mondulkiri, for National Road 76 (he loves road inaugurations and graduation ceremonies):

“Don’t worry; the opposition party has no possibility of breaking [the Cambodian Peoples Party]. At that time, who will be a Minister of Public Works? [We] don’t know yet, but the only candidate for prime minister is me.”

Ah, there’s nothing like the “fresh breeze of democracy.”

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Ta Prohm, Siem Reap (January)

Ta Prohm, Siem Reap (January)

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